Teachers' Retirement System (TRS)

Connecticut's Teachers' Retirement System (TRS), one of the State's largest retirement systems, is a "defined benefit plan" administered by the Teachers' Retirement Board. A defined benefit plan means, upon retirement, an eligible teacher participating in TRS will receive a fixed pension benefit that is determined by the number of years the individual taught in Connecticut public schools and the individual's final average salary.

Since 1939, TRS has provided retirement benefits to its members. However, for much of the system's history, the State did not properly save for the retirement benefits promised to teachers participating in TRS. Instead of "pre-funding," or contributing to an employee's pension benefits from the beginning and entirety of his/her employment, the State of Connecticut used a “pay-as-you-go” approach and paid pension benefits to retired teachers as they came due through annual appropriations.

As a result of this practice, and several other critical factors, TRS has accumulated more than $13.1 billion in unfunded liabilities and is currently considered a poorly-funded pension system with a funded ratio among the worst in the nation at only 56 percent. A pension system's funded ratio refers to the percentage of total assets in a system to pay for future payments to retirees and current employees.

Three primary factors have driven TRS' unfunded liability problems:

1. Years of No State ContributionsPrior to 1979, retirement benefits earned by TRS members were completely unfunded by the State of Connecticut. While participating teachers made contributions from their paychecks (and currently contribute six percent of their annual salaries), the State did not begin pre-funding TRS until 1982. Although the State began pre-funding 35 years ago, the impacts of its years of no contributions to TRS are still being felt. More than $4 billion (38 percent) of TRS' total unfunded liability in fiscal year 2014 was attributable to the State not contributing to the pension system for 40 years.

2. State Contributions Often Fell ShortOnce the State did begin making contributions to TRS, it often did not make its full annually required contribution (ARC). Beginning in 1979 with a contribution of 35 percent of its ARC, the State was required to gradually increased the portion of its ARC that it would contribute to TRS until 1993 when the State was expected to make its full contribution. However, not only did the State fall short of contributing its scheduled payments multiple times prior to 1993, but it failed to make its full ARC until 2008. While the State has made its full ARC every year since 2008, as required according to the pension obligation bonds the State issued that year, its underfunded contributions added $1.5 billion to TRS' total unfunded liabilities by fiscal year 2014.

3.Assumed Returns Have Been Overly Optimistic in Recent YearsTRS' unfunded liability has also increased over the years as a result of investments made with TRS pension funds failing to meet their assumed rates of return. From fiscal year 1983 to fiscal year 2000, investments made with TRS pension funds regularly produced return rates higher than the system's assumed rate of 8.5 percent. During this time, TRS' averaged an annual actual rate of return of 13 percent — 4.5 percentage points higher than its assumed rate. These higher than assumed rates of return lowered TRS' unfunded liabilities. However, since fiscal year 2001, TRS' annual actual rate of return has fallen short of its assumed rate five times, and its average actual rate of return has been six percent. As a result of these return shortfalls, TRS' unfunded liabilities have increased by billions of dollars. Although lower actual rates of return have been more frequently realized in recent years, TRS' assumed rate of return remained unchanged at 8.5 percent until fiscal year 2016 when it was lowered to 8.0 percent, despite many in academia and the financial sector arguing that a more realistic assumed rate since the Great Recession would be closer to three or four percent.

Note

In fiscal year 2008, Connecticut sold $2 billion in pension obligation bonds (POBs), the proceeds of which were intended to bolster TRS by reducing its unfunded liabilities. This resulted in a one-time influx of cash to TRS, which has had the effect of inflating TRS' funded ratio. POBs are an additional form of debt. The State makes annual debt service payments on the POBs, however, these payments are not included in calculations of the State's ARC to TRS. Instead, they are included in the debt service line-item of the Connecticut state budget.

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